Problem:
In the past, TTTH Inc. allocated indirect manufacturing costs based on direct labor hours. Recently, management has decided to pilot a system of time-driven activity-based costing (TDABC) to allocate these costs. The division produces three engine models: Basic, Sport, and Heavy Duty. Acme employs 300 employees to perform indirect labour functions, consisting of machine setups, engine inspections and shipping. Each employee is paid $50,000 per year on average, including benefits. On average, each employee works 1,600 hours per year. Each automated production machine is used 1,600 hours per year, including set up time. Once a machine is set up, no labour is necessary to oversee it.
The following information has been obtained from the company's records over the past year:
Basic Sport Heavy Duty
Units produced 500,000 150,000 50,000
Direct material cost per unit $40 $50 $60
Direct labour cost per hour $30 $30 $30
Direct labour hours incurred 200,000 225,000 40,000
Inspections per engine 2 3 4
Inspection time per engine (hrs.) .1 .2 .3
Engines packed and shipped per batch 2,000 1,000 500
Individual engine packing time (hrs.) .25 .3 .4
Additional preparation time per batch (hrs.) 30 20 15
Machine set-ups per year 240 180 60
Labor hours for each machine set-up 30 40 60
Required:
a. Determine the indirect labor support costs for each engine using time-driven activity-based costing.
b. Determine the per cent of unused indirect labor compared to available indirect labor hours. Draw conclusions from this analysis.